Owning the stack: The legal war to control the smartphone platform

The Smartphone Wars have now become an all-out legal battle, with copyrights, …

In the last few weeks, the smartphone industry appeared to produce more lawsuits than phones. Apple briefly managed to stop the sale of the Samsung Galaxy Tab 10.1 in all of Europe, and is now going after the whole Galaxy line. Back Stateside, Google first complained that Microsoft and Apple were using "bogus patents" to target Android, then spent $12 billion for Motorola and its patent arsenal. These are big, high-stakes fights—and the last company left standing may walk away with control over nothing less than the smartphone market itself.

In the flood of stories about tactical filings and counter-filings, it's easy to get lost in the details. But step back and it's clear that the Smartphone Wars aren't just a war of all against all; there's an underlying logic to these disputes. Most companies are fighting to control one part of the hardware-software stack, then use that control to pry money free from the layers above them.

But the really big players—the Apples and Googles of the world—are fighting over the stack itself. Their combat arena: the global legal system.

Meet the stack

A smartphone's "smarts" require plenty of tech. Think about all the layers that come together so that you could play Angry Birds on your iPhone:

The app itself: Rovio's Angry Birds

The operating system that supports downloadable apps: Apple's iOS

The device that runs the OS: the iPhone, also by Apple.

The cellular network that the device connects to: AT&T or Verizon in the US

These different parts make up a stack: layers that fit together, each one on top of the next, to do cool things for users. Good combinations sell well, making money for the participants. Everyone wants to be part of a winning stack, but even better is to be the bottleneck in a winning stack so that everyone else can join in only on your terms—and at your price.

Enter the law. Players in the Smartphone Wars use lawsuits and threatening letters on law-firm letterhead to secure the ground on which they stand, or to cut the ground out from beneath someone else, all seeking to secure or bolster their place in the stack. There are three kinds of plays:

Horizontal plays are disputes between players at the same level in the stack. The goal is to keep a competitor from imitating you too closely. When app developers copy each others' names, icons, and artwork, that's a horizontal issue: they're competing for the same consumer dollars by doing the same kind of thing a little too slavishly. The law here—primarily copyright, trademark, and patent—is all about balance. With weak protections, copycat ripoff artists come out of the woodwork; with strong protections, the problem is trolls.

Vertical plays try to seize control of the stack from the players above (and sometimes from the players below). Think about the iPhone's anti-jailbreaking features, which are designed in part to ensure that no one puts an app on an iPhone unless they pay Apple's 30 percent toll. This is a subtle game; companies want to be open enough to be part of a rich and vibrant stack, but closed enough to capture value from the other layers. Copyright and the DMCA do a lot of work here, with antitrust increasingly pushing back against them.

Strategic plays target an entire stack. The all-out patent wars now coming to a boil are strategic: if some of Apple's lawsuits succeed, the whole Android stack could end up toast. There are also plays here designed not to shut down a competitor but to hold a stack upside down and shake it until all the money falls out. Patents are the preferred weapon here. Since there's no "independent invention" defense, a well-aimed patent barrage can land without warning and leave nowhere to hide.

So here's the plan: we'll start at the bottom of the stack and move up, looking at the horizontal and vertical plays taking place at each level. Then we'll circle back and look at the all-out assaults on the different competing stacks.

Controlling the Network

Vertically, life at the network layer is regulated by the Federal Communications Commission. The FCC allocates blocks of spectrum to the carriers, usually by auction. In order to start running a cellphone network, you need to persuade the FCC either to make more spectrum available (which doesn't happen often but may be in the works through a reallocation of the UHF TV spectrum) or buy access from someone who has spectrum already. At the moment, the four biggest US networks are run by Verizon, AT&T, Sprint, and T-Mobile (AT&T's proposed merger with T-Mobile has run into trouble over fears that it would lead to too much concentration and too little competition.)

Horizontally, the carriers have been known to throw some sharp elbows at each other in their cutthroat competition for subscribers. In 2009, AT&T sued Verizon over Verizon's "There's a Map for That" commercials making fun of AT&T's lackluster 3G coverage. A judge sided with Verizon in the first round of skirmishing, and the companies quickly settled after that.

Controlling the device

Moving up to the device layer, let's start with vertical controls by the network operator over devices. Most often, whoever owns a block of spectrum can set whatever rules they want about who can use it and on what terms. One partial exception is the "700Mhz block," which was auctioned off in 2008. Google entered the bidding and forced the price up enough to trigger open access rules allowing consumers to use devices and applications of their choice. Google—whom we'll meet repeatedly as we reach the higher layers of the stack—is concerned that anyone with too much control at a lower layer could use that control to squeeze free some of the cash pouring out of its search advertising money machine by threatening to cut off access unless Google pays up. (This same fear of being squeezed drives Google to support network neutrality, albeit half-heartedly.)

The traditional model in the industry was that carriers would use their more-or-less absolute lock on the network to take the upper hand in negotiating with device makers over which phones would be available on which networks. The only way for device makers to fight back was to have a truly compelling phone that users would actually switch carriers to use. RIM pulled it off with the CrackBerry, then Apple managed to talk Cingular/AT&T into unusually generous terms, including higher-than-usual subsidies for the iPhone and more control over iPhone packaging and sales. Another alternative for device makers is to route around the carriers by going WiFi-only: the iPod Touch is effectively a "phone-less phone."

Unsurprisingly, carriers also want to convince customers—willingly or unwillingly—not to switch networks once they have the phone, which means taking a little control over the phone itself. Early termination fees, backed up by contract law, are the first line of defense. But there's also a technical angle. Locking is an antifeature that keeps the phone from working on any other network. Presto: the cost to switch carriers has just gone up by the price of a new phone. For this reason, there has always been a thriving business in unlocking cell phones and in telling other users how to unlock them. And that doesn't make the carriers happy. Tracfone, a cellphone company that sells prepaid by-the-minute plans, started suing retailers who unlocked its phones for a violation of the DMCA. (The "copyrighted work" in question is the software on the cell phone itself.) This led the Library of Congress to exempt unlocking from parts of the DMCA in 2006 and again in 2010. Tracfone, though, has kept on suing unlocking retailers, and has even won despite the exemption.

Horizontally, there have been some fairly silly lawsuits over phone names. Would you have thought that Motorola's DROID should get a license from George Lucas? Or that ANDROID itself might step on the toes of Android Data's rights? (A judge held that it didn't.) Would a phone-buying consumer think that Google's NEXUS comes from the estate of Philip K. Dick? Google also had trouble with a similar mark from a telecom company; Google's successful defense was that tons of other computer and telecom companies use NEXUS (not exactly the best defense of Google's own trademark rights in the word). More recently, Motorola has been sued by Xoom Wireless over the XOOM. You might also remember the BLACKBERRY vs. BLACKJACK dispute, or the brief Cisco-vs.-Apple fight over IPHONE.